Netflix and Astro both witnessed an inflection point in their business marked by declining subscribers for Netflix and declining subscription and advertising revenue for Astro which resulted in both companies share price declining substantially. Nonetheless, we believe that the tide is turning for Astro due to key developments in the industry as well as the group’s own initiatives. With decent downside share price support from its attractive dividend yield and improving long term prospects for the company, we believe that the stock is a compelling investment case. Maintain BUY with an unchanged DCF-based TP of RM1.34 (WACC: 8.6%, TG: 0%).

The inflection point. Netflix’ loss of 200k and 970k subscribers in its 1Q22 and 2Q22 respectively was the group’s inflection point, stoking concerns on stagnating growth and possibly the beginning of a declining trend, resulting in its share price declining - 61.5% YTD. This is markedly similar to Astro’s case as when both its subscription and advertising revenue marked a YoY decline in its 3QFY18 results, Astro’s shares started to show a declining price trend similar to what Netflix is currently experiencing.

Reasons that led to Astro’s revenue decline. The decline in subscription revenue was due to (i) the proliferation in the use of illegal TV boxes allowing users to stream paid content for free; (ii) increased competition from Unifi TV bundled with other TM services (internet and telephone); (iii) competition from other streaming services; (iv) lower household income and operating restrictions caused by the pandemic leading to declining household subscription; and (v) social restrictions from the pandemic which negatively impacted commercial subscription. On the other hand, the decline in advertising revenue was due to (i) the advent of digital advertising such as on Facebook and Google, causing a cannibalization of market share from traditional advertising channels and (ii) Astro’s declining user base in its broadcasting assets TV and radio.

The tide is turning. However, there have been some key developments that we believe will help turn things around for Astro. The Copyright (Amendment) Act 2022 will help to reduce the number of illegal TV boxes being used and sold as it allows Astro to take legal action on illegal TV Box sellers and illegal distributors of its content. Other than that, Astro is able to deal with the increased competition from Unifi TV as well as other streaming services by launching its own fibre broadband service and becoming a streaming service aggregator respectively. With the launch of its own broadband service, Astro is also able to provide a similar value proposition as TM to its customers by providing a one-bill convenience and additional cost savings from the bundles. On the other hand, instead of directly competing with streaming services for viewership, Astro has pivoted its strategy to become a streaming service aggregator and provide more value in its content bundles. Moreover, with Malaysia entering endemicity and with stronger job security, we believe that this also would buck the pandemic-led decline in household and commercial subscriptions. Lastly, with various industry headwinds facing digital advertising companies such as Facebook and Google, as well as a narrowing ROI gap on ad spend as compared with Astro, we believe that more advertisers will start returning to traditional channels of advertising such as TV and radio, especially with the launch of Astro’s addressable advertising.

Timing the inflection point. With the decline in revenue marking an inflection point, causing the share price decline of Netflix and Astro, we believe that the opposite could also happen. A recovery in subscription and advertising revenue would signal a reversal inflection point which could provide a re-rating opportunity for Astro’s valuation. It would be difficult to time the inflection point, but we believe that the economic recovery from the pandemic, the recently passed regulations and Astro’s own initiatives are all pointing favourably to this recovery. Maintain BUY with an unchanged DCF-based TP of RM1.34 (WACC: 8.6%, TG: 0%).

Source: Hong Leong Investment Bank Research - 16 Aug 2022